The fintech realm is jam-packed with trading apps, brokerage platforms, traditional banking services, and more. One of the rising stars of the fintech industry is Robinhood (HOOD -0.46%).
So far this year, shares in Robinhood have soared 27% -- roughly triple the gain in the S&P 500.
Is this because Robinhood offers the best quality products and services in the financial industry? Maybe for some, that's the case. For me, I think Robinhood has a secret weapon that few are talking about.
Let's break down how Robinhood is winning over customers and explore why scooping up some shares could be a lucrative move in the long run.
A brief trip down memory lane
Although Robinhood has been around for more than a decade, I'd wager that most investors were only peripherally familiar with the app until a few years ago.
In 2021, a finance personality on Reddit known as Roaring Kitty helped orchestrate one of the biggest short squeezes in modern history. Specifically, a large group of day traders rallied around ailing retailer GameStop and sent the stock parabolic for a brief period.
While some people profited handsomely from this ordeal, there were also a lot of investors left as bag holders. Buying into momentum in the stock market carries significant risk, and day trading is often best avoided.
One of the figures that emerged in the spotlight during the GameStop saga was Robinhood. Since the app is popular with younger demographics such as Gen Z and millennials, it's not surprising that a lot of younger, impressionable, and unsophisticated investors were attracted to the casino-like aspects of the GameStop story.
Unfortunately, given many of these first-time investors ended up losing money in the end, Robinhood suffered some reputational damage and was viewed by many as a gateway to trading meme stocks.
However, during the past couple of years, Robinhood's management has done an impressive job repairing the company's image. Of note, this wasn't done through a series of scripted interviews and an overly apologetic tone from Robinhood's executive leadership.
Rather, the company spent the past few years investing heavily in research and development. Today, Robinhood is a much more sophisticated platform spanning various aspects of the financial services spectrum.
Image source: Getty Images.
Setting the gold standard
One of Robinhood's more interesting features is its Gold Platform. Robinhood Gold is a subscription option on the app that provides a number of premium features that are not included in the company's basic tiers.
Last June, Robinhood announced that it was acquiring a credit card start-up called X1 for $95 million. Although it's taken nearly a year, Robinhood's ambitions with X1 are finally starting to look clearer.
At the end of March, Robinhood announced that it was releasing a credit card. Known as the Gold Card, Robinhood's credit card comes with a number of perks and cash-back features.
I know what you're thinking: It's just another credit card. What makes the Robinhood Gold Card unique is that it is only available for Gold subscribers.
I think the exclusive nature of the Gold Card is genius. As the graph below illustrates, Robinhood already has 1.7 million subscribers on its Gold tier. More importantly, the annualized subscription revenue for Gold members has risen every quarter over the last year.
I suspect that with the introduction of the Gold Card, Robinhood will see an influx of existing users upgrading to the Gold tier, as well as new membership growth out of a desire to acquire the exclusive credit card. Since Gold membership requires a subscription, I think Robinhood has just identified a major source of new high-margin revenue.
Image source: Robinhood Investor Relations.
Is Robinhood stock a buy?
The chart below illustrates the price-to-book (P/B) ratio of Robinhood benchmarked against other leading fintechs. At a P/B of just 2.2, Robinhood is valued at a significant discount relative to many of its cohorts based on this measure.
HOOD Price to Book Value data by YCharts
With that said, considering the surge in shares during the past several months, Robinhood stock is hovering near its highest price in a year.
I think Robinhood is on a path to long-term revenue and profit growth. While the fintech landscape will remain highly competitive, I see Robinhood as a leading innovator. I think a prudent strategy would be to take a small position in the stock, and add shares over time through dollar-cost averaging. This will mitigate buying into the stock during prolonged periods of momentum, while also allowing you to monitor the company's progress and growth efforts.
